Can I use my self-employment grant towards a deposit for my first flat?

If you’re self-employed and have recently been hit hard by a loss of income due to Covid-19, you may have recently received a self-employment grant from the Government. 

This vital lifeline has been welcomed by many small business owners, from hairdressers, plumbers, electricians and freelancers. 

The amount that self-employed workers receive will vary and you might only be left with a modest amount to squirrel away after catching up with their other expenses such as rent.

But if you are lucky enough to have money leftover from your grant or have been able to save money throughout the pandemic by reducing your outgoings, what should you do?

Should I pay off debt or save money if I want a mortgage after Covid-19?

The interest rates on personal loans, credit cards and overdrafts are usually much higher versus other forms of lending, which can make borrowing costly if left unaddressed.

The typical credit card rate varies but could be as high as 19% and savings rates throughout 2020 so far haven’t been great.

In other words, it could be more expensive to borrow money than to save it. 

Anyone with savings who also has costly debts should therefore consider using at least part of their savings to help clear their debts, though seeking independent financial advice from an expert is always recommended.

What debts should I pay off first if I have money put by?

It makes sense to always pay off the most expensive debts first, so compare the interest rates. Looking through the terms and conditions for any penalties too as this could affect the amount you pay back to the creditor overall.

For example, if you had a credit card that had a penalty of several months’ interest if you pay off the debt before the end of the loan term, it could still make financial sense to clear the debt, however, you have to factor the penalty fee into your calculations.

Do I have to be debt free to apply for a mortgage in 2020?

No, there are lenders across the UK that accept borrowers with debt, though you may find their interest rates are less competitive and therefore if you have severe forms of bad credit, you might end up paying more for your mortgage overall.

That isn’t necessarily always the case though because some lenders take other factors into consideration.

• The type of mortgage you’re applying for

• Your credit history

• Your income

• The type of property you’re buying

• The location of the property you’re buying

• Your age (older borrowers nearer retirement can be asked for larger deposits)

For example, if you have recent debt but the amount is small and your income is substantial enough to cover your loan repayments as well as your future mortgage, a lender may be happy to approve your application. 

Will lenders accept the Self-employment grant as a deposit source?

With the help of a mortgage broker, you could be in a better place to start saving and eventually start comparing prices and deposit requirements. However, mortgage deposit requirements differ depending on the lender. 

Personal savings are the most common form of mortgage deposits in the UK and while some lenders might not have an issue with accepting income from a self-employment grant as a deposit, others may. 

Again, this is something our brokers can check for you.

How much deposit do lenders typically ask for?

Most first-time buyer mortgage lenders require a minimum of 5% of the property value though even before Covid-19, many asked for figures between 10 - 20%.

In light of recent circumstances, the choice of lenders offering deals with small deposits could be limited, especially as some mortgage products with high loan-to-values were removed temporarily from the market. 

Having a larger deposit would mean that you need to borrow less money, which presents a lower risk to the lender who therefore may be more open to lending to you.  

Depositing a larger chunk of the property’s market value would also mean you own more equity. Banks and lenders can prefer their borrowers to own more of the property as it can suggest commitment to the purchase and repayment of the loan.

Calculate my deposit size for a flat in 2020

Unless a lender knows your circumstances and has detailed information about your income, outgoings, debt, savings and deposit size, they can’t provide you with an accurate figure for your deposit size. 

This can be frustrating for borrowers who want a target to aim for when saving but talking to a broker can help ascertain this information without the need for a hard credit check.

They can check your eligibility for a range of products and can contact lenders on your behalf to clarify requirements and get a precise figure.

Are there alternative ways I could save up for a deposit?

Interest rates on savings accounts are fairly low and unfortunately, applications for the Government's Help to Buy ISA scheme ended at midnight on 30 November 2019.

If you have already opened a Help to Buy ISA (or did so before 30 November 2019), you will be able to continue saving into your account until November 2029. 

There are alternative options that may be available to you though, including Help to Buy equity loan or shared ownership. An equity loan is just that, a loan, so keep in mind that you will need to repay it back. 

Shared ownership won’t help you with your deposit but it could help you onto the property ladder by letting you buy a percentage of a property, which could be more affordable. 

You’ll have to pay rent on the portion that you don’t own and depending on the circumstances, you may be able to buy additional shares in the future. 

Are there any first-time buyer schemes that could help me?

Rishi Sunak announced details about the First Homes programme in March, though further information is due to come by the end of 2020. The scheme will be open for local first-time buyers and key workers, providing a minimum of a 30% discount.

Advice on saving for a mortgage after Covid-19

If your finances have changed during Coronavirus, whether for the better or worse, you could benefit from seeking advice from a mortgage broker. 

We understand how much getting onto the property ladder means for people and strive to provide actionable advice based on expertise and years of experience.

Give us a call on 023 8023 555 or if you’d prefer, send us a message and we’ll get back to you as soon as possible.